Electric company cars facing sharp tax rise in UK

Electric vehicles (EVs) face a 23% increase in company car tax next year in the UK, the culmination of steep annual rises over the past five years.

In the 2014-15 financial year, zero emission cars incurred no tax at all. The following financial year, however, their benefit charge jumped to 5 percent of the list price of the car, and this rose by two percentage points in each of the next two tax years.

These step-changes accelerated by four percentage points (equivalent to a 44% rise) in the current 2018-19 financial year to reach 13% of their list price and it will leap again next year to 16%.

To put this into perspective, as recently as 2016-17 a petrol car with emissions of 95-99g/km of carbon dioxide was taxed at 16% of its list price.

The tax treatment of zero emission cars will then change dramatically again in 2020-21, when it drops from 16% to just 2% of the list price of the cars.

Source: Office for Low Emission Vehicles

What tax rise means for drivers

In real terms this means that an electric car with an official price of £30,000 (about €34,000) will cost a lower rate tax payer £780 (€900) in tax in the current financial year, £960 (€1,100) in tax in 2019-20, but only £120 (€140) in 2020-21.

The rise and fall is even more marked for higher rate tax payers who pay income tax of 40% on their earnings. For these drivers, the company car tax on a £30,000 EV rises from £1,560 (€1,770) in the current financial year to £1,920 (€2,200) in 2019-20 before falling to £240 (€275) in 2020-21.

The changes will also bring sharp falls for employers in their National Insurance contributions on EVs, after years of steep increases.

Fleet reaction to changes

In a statement to the Government earlier this month, ACFO (Association of Car Fleet Operators) called for a U-turn on the decision to scrap next year’s tax rise for EVs and introduce immediately the 2% tax rate for battery-powered cars.

The short term company car increases are holding back fleet orders, according to Andrew Leech, managing director of Fleet Evolution. He described the British government’s current policy as ‘misguided and confused’.

“Many of our customers’ drivers have told us that they would like to select an electric car as their next company vehicle. But they have been put off by the confusing tax picture for the next three years,” he said.

“The question we have for Government is ‘why penalise EVs so harshly from a tax point of view this year and next, only to offer huge tax incentives a year later?’” said Leech.

“It just makes no sense at all. When you combine rising taxes with the comparatively high list price of electric cars, which is measured before the impact of any government grant for company car tax purposes, it doesn’t make financial sense to choose an electric car in 2018/19 rather than a petrol or diesel equivalent.”

EVs still cheaper for tax over long-term

Measured over the next three years, however, “electric vehicles will be the cheapest type of vehicles to provide to your employees,” said Clare Clifford, tax partner and director of accountancy firm Baldwins.

“The Government and HMRC [the UK tax office] are trying to encourage people to use more fuel efficiency and lower emission vehicles. The benefit in kind tax for EVs will rise for 2019-20, but then fall dramatically for 2020-21 to quite a low benefit charge to encourage the use of EVs.”

Tax rises for hybrid cars

The impact of the new tax system also applies to hybrid cars with emissions of 1 to 50g/km of CO2. These will see their benefit charge for company car drivers increase from 13 percent to 16 percent in the next financial year, before dropping to 2 percent for cars capable of a range in excess of 130 miles (200km) in zero emission mode in 2020/21; to 5 percent for those with a battery-only range of 70-129 miles (110-200km); 8 percent for a range of 40-69 miles (65km to 110km); 12 percent for a range of 30 to 39 miles (48km to 60km); and 14 percent for a range below 30 miles (48km).

Across the UK market as a whole, sales of alternatively-fuelled vehicles continue to rise, up 22% year-on-year for the first nine months of 2018 to account for a 6% market share.

EV sales under threat

This success will be jeopardised, however, by the Government’s decision this month to cut subsidies for new EVs by one-third and to remove grants for plug-in hybrids, according to the motor industry.

Mike Hawes, SMMT chief executive, said, “Given the importance of environmental goals, it’s astounding that just three months after publishing its ambitious vision for a zero emissions future, government has slashed the very incentive that offers our best chance of getting there. Industry is working hard to address the challenges of CO2 and air quality but, while it can produce the technology, it cannot determine the pace of uptake. We have consistently said that if the UK is to be fit for an electrified future, we need a world-class package of incentives and infrastructure. Government needs to rethink its policy, else its ambitions will never be realised.”